problem 1: Six years ago, you made a fully amortizing, thirty year, fixed rate mortgage for $350,000 at 4.5% and 80% LTV. Since then, the house has appreciated by a total of 20%. Assume you only ever made scheduled payments on the loan.
a) What was the value of your house 6 years ago when the mortgage was made?
b) What is your current equity? Your current LTV?
c) How much could you borrow today, if you wanted your new total loan-to-value to be 80%?
d) Suppose you want to borrow the amount in (c), on top of your current debt. Today, rates on 80% 24 year mortgages are 5.5%. What would have to the rate on a 24 year HEL for you to prefer keeping the old loan plus the HEL? Assume you will keep all mortgages for their full (remaining) term and only pay the scheduled amounts, and that there are no lender fees.
e) How does your answer in (d) change if the original loan had a 2% prepayment penalty?
problem 2: A property is available for sale that could normally be financed with a fully amortizing $80,000 loan at a 10% rate with monthly payments over a 25 year term.
a) What would be the monthly payments with “normal” financing?
b) The builder is offering the buyers a mortgage that would reduce the payments in (a) by 50% for the first year and by 25% in the second. After the second year, the mortgage reverts to the regular monthly payments for the remainder of the term. How much would the builder have to give the bank to buy down the payments as described?
c) Would you recommend the property be purchased if it was selling for $5,000 more than similar properties that do not have the buy-down available?
problem 3: An investor has owned a property for 15 years, the value of which is now $200,000. The balance on the original loan is $100,000 and the monthly payments are $1,100 with 15 years remaining. He would like to obtain $50,000 in additional financing. A new first mortgage for $150,000 can be obtained for at a 12.5% rate and a second mortgage for $50,000 at a 14% rate with a 15 year term. Alternatively, a wraparound loan for $150,000 can be obtained at 12% and for a 15 year term. All loans are fully amortizing and ignore taxes and fees.
a) Which alternative should the investor choose?
b) What is the wrap mortgagee’s return on investment?
problem 4: You always have had a very high FICO score. A bank has owned your fixed rate, fully amortizing 30 year loan for 10 years. The original principal was $300,000 with a note rate of 3.5%, and you only ever made scheduled payments. Current 20-year mortgages for prime borrowers are 6%. Ignoring prepayment effects, at what discount to face could the bank sell your mortgage for in the secondary market?